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Friday, September 29, 2006

GOLD

America's favorite commodity recently. It is strange how knowone cared at all about gold until the last few years. This is what a big rally will bring, lot's of hype and discussion.

Notice the chart on the left. The 3 fundamentally related indicators, the commercials, the seasonal trend, and it's relative valuation to the dollar all have bullish setups. However, the price is in a bearish flag pattern. We also have calming inflation, which is related to the dollar, and is bearish for GOLD. This valuation indicator on the bottom which measures pure relative valuation of the dollar to gold is an oversold/overbought indicator. So you can see that we can have both a relative oversold reading here indicating a bullish stance, yet along with that declining inflation which is bearish. You can see from the chart that the declining inflation which from my research is the most important driving force for prices in this market, has won this battle so far. No surprise the favorites usually win in life.

From a pure trading perspective this would be a short sale setup just based on the pattern. With all of the fundamentals lined up on the bullish side, I will not short this flag. I am looking either for a breakout above the downtrend line to get long, or the commercials and other fundamentals to shift to the short side during any bounce for a short entry. Once these things line up either way I will be looking for a bar pattern entry to enter this market. The chart pattern here mirrors the fundamental picture here in that it has been indecisive over the last few months.

Wednesday, September 27, 2006

Japanese Yen

Here is a market that is setup to rally but continues downward. The seasonal tendency is for a rally at this point, and the commercials are heavily long. However, as you can see by the red line drawn on the screen, we are in a strong downtrend.

I have marked a B for buy on the chart above that downtrend line. Any weekly close above this line at this point would be a signal to go long this market. Then if the trend does change to upward we can trade pattern setups along the way.

Until this trendline break, NADA. To quote Tom Petty, "the waiting is the hardest part."

Monday, September 25, 2006

It is a natural human tendency to try and sell high and buy low and in general that is what we want to do as traders. However, we must balance that with not stepping in front of trends.

I have been run over enough times fighting trends in my life to itleast understand the danger in doing so. Here we have the bonds is a big uptrend, almost in breakaway mode at this point. I was out with a friend on Saturday who had no idea rates were going down because he has been listening to the media talk about higher rates.

There are a couple of reasons including the heavy short position the commercials have, to look at possibly shorting this market. However, this is a very strong uptrend, so the conditions are really going to have to be ideal for me to do it. I did find a good short pattern for today that had been great except when it occurred after 4 consecutive up closes which is what he had going in. As a result, the trade got nixed. Maybe something will set up for tomorrow, but this trend is very strong.

Friday, September 22, 2006

The mighty S&P

Have we started down yet? Possibly what we are seeing now is the beginning of the downmove so many yours truly included, have been looking for.

Plotted at the bottom is a ratio of the S&P to the Nasdaq Composite. There are pundits out there that will tell you the Naz leads. I think I might argue the opposite, but have not really found a relationship of any consequence either way. I am continuing to study this so maybe I will find something. What this shows at the moment is that the Naz is leading. Yet the Naz is only about half of it's all time reading where the S&P is very close to it's all time high. So, it is hard for me to see how that shows that the NAZ leads.

The red trend line is the key here. We have a very strong bond market which is supportive of stock prices, but these two markets have been known to diverge for periods of time. I was short yesterday and caught a nice short term downmove. However, until we break the red trend line this has to be viewed as just a pullback in an uptrend. My gut tells me otherwise, but the trend is up so that has to be the guide for now. If we get a break of this trendline on a closing basis then more downside should be expected.

Thursday, September 21, 2006

Crude is getting crunched

If you go back to the archives and read my post from 8/16 you will see the bearish comments I made about Crude. It was trading at 73.19 at that point.

This is the type of thing that can happen when fundamentals change, the trend changes. I did not predict a major top even though that is what we had, but I pointed out several bearish signs that had developed. You have to stay with the fundamentals and the trend to stay ahead of the game in futures.

The commercials are shifting back in the direction of the long side of the market, but are not yet in a bullish enough position to signal a bottom. Besides the trend is down, so how far we go is anyone's guess. For me it is sell the rallies at this point. Hopefully on any rally against the downtrend we will get a shift in the commercials down back to the short side. It will be pedal to the medal if that setup occurs.

Wednesday, September 20, 2006

Here is the Booming Bond Market

We exited our short term long trade from the service today on the opening for a decent profit, marked on the chart. Just a brief word about systems trading. Today's bar pattern had a very bullish slant to it, and yet we had a profit taking order for the opening. Why exit if the odds are strong on another good up day?

Certainly someone can use this type of discretion in trading and in this case it would have payed off. However, I choose to follow my rules strictly which is of immense help during down periods. There is so much emotion tied to trading that removing as much of it as I can is very helpful to me. This stops all of the second guessing.

We have broken above the red line indicating the larger picture last remaining downtrend line. I still remain skeptical of this rally from a larger view, but for now the short term trend is up and that is all that matters. The trading system has done nicely navigating this market over the last few weeks, so for those of you taking all of the trades you should have been nicely rewarded.

Tuesday, September 19, 2006

The Lumber Market has been under heavy pressure for quite awhile. The steady downtrend is obvious when looking at this chart. However, this market is setup for a possible trend change. POSSIBLE.

The commercials have become heavy buyers of this market for quite awhile. This is an example of what I have mentioned many times about how they are early at times. The typical seasonal low is in October, so if this downtrend line can be broken in that month it is a breakout that should be taken.

Also notice the strong divergence in the ProGo oscillator at the bottom. I am watching this closely and plan on taking this trade when it comes along.

Sunday, September 17, 2006

Here we are in the midst of this rally in the S&P in the face of a seemingly questionable economic climate. How can this be? If we keep things simple which is of paramount importance in trading, look at the chart on the left.

Bond prices are rising (rates dropping), and the commercials are increasing their long positions on the rally in price. This does come at a time when typically we see lower stock prices.

Both of the above mentioned conditions are conducive to rallies, and we have the cyclical election rally bias at hand as well. It is yet to be seen whether or not a decline will happen into the OCT/NOV time frame. As long as the bond rally holds, I do not think a big drop will occur. If one does and bonds hold up well, we will have a very good buy setup to take advantage of.

I have not as of yet established a long stock position, so I have missed the boat so far. However, I am content to follow my rules for entry and wait for them to line up properly. I am more concerned about being correct when I enter, than catching every single move in the markets. I do not have any good short term sell patterns at hand, so nada here for the moment.

Friday, September 15, 2006

In May I posted current charts of Silver and also the Silver chart from the all time high and asked if anyone thought they looked familiar? They were identical (the correct answer).

Following up with this at a later date, I described a pattern with a large run up followed by a sharp drop, then a rally attempt that fails to make new highs. As "luck" would have it this is exactly what we have gotten. This is a GOLD chart not Silver, but the formation and concepts are the same. In this formation, the low of the sharp drop 574.50 becomes the key support point. This is marked by the red line on the chart.

When these support points get taken out generally a large drop follows. We are very close to that low being taken out here, and if it does get penetrated the game is over in this market. Keep in mind there are no absolutes in trading just tendencies that we need to be aware of to more effectively manage our risk.

For those of us who have watched these types of things painfully punish the chasers over the years, it is clear when people start talking about outlandish price levels like $1300, $1800, $2800 that the top is in. This has not been easy to short by any means and I have not done it. However, I have completely stayed away from the long side mostly due to this big picture pattern that has been forming. Had a strong short term buy pattern setup while the trend was still up, I would have taken it, but nothing did.

Thursday, September 14, 2006

Here we have a SP 500 chart with the uptrend line marked. In spite of what "should" be happening, this shows what is actually taking place. A very solid rally backed by dropping interest rates.

As many of you know I have been looking for a decline into the fall setting up a major buy spot. Will we get it? There is no reason at all to be short this market other than short term trading, until that uptrend line breaks. It comes in today at about 1310.

Before we can get any exictement going about a selloff, we have to break that uptrend line. Until we do the trend is up so be careful about shorting. One of these days we will probably get one of those "shake the tree" days where they break the market hard and the trend changes. However, it is very difficult to fight a trend day after day looking for that one home run. I do not suggest doing it.

Wednesday, September 13, 2006

S&P 500

Once again yesterday the seasonal effect failed to have an effect. The fact of the matter at this point is that the seasonal pattern is just not playing out this year. I was aware of it, so I only had 2 contracts on yesterdays day trade compared to the 30 I normally trade. As a result the 5 point loss is barely a normal commission.

This is where some judgement has to come into play with trading. I did it yesterday not by screening a trade completely but through the modificiation of my risk. I know that the day trades to begin with are the least reliable, so already they get half the risk allocated to it that overnight trades do. Next, if we have something so obviously amiss, I reduce the risk further.

The seasonal being completely opposite this year represents that "obviously amiss" category. Maybe we will still get a dip into the fall, but at this point unless that occurs we have to disregard the seasonal pattern, it is out of sync this year so far. I "think" the reason for this is the strong rally in the bond market.

Tuesday, September 12, 2006

S&P 500

Here is a market that is not "behaving." There is a very strong seasonal tendency for this market to be going down but it has a strong rally happening. Further, today is one of the most bearish single days of the year, the 7th trading day of September.

I do have a short position in a day trade that was entered at 1317, which is right about where the price is as I post this. There are a couple of other bearish patterns in place here. An outside bar following and inside bar where the outside bar has a positive close is also a short term bearish pattern.

As a result, my trading system has generated a sell signal to be exited at days end. This is a counter trend trade, so it is not lined up anywhere near perfectly. However, when your method says to sell you sell, when it says to buy you buy. It really needs to be that simple. You take the trades when they favor you and just accept what happens.

Sunday, September 10, 2006

Still Waiting

The yen is a market set up for a buy signal, yet nothing has happened yet that justifies being long. Having worked on this pattern for awhile, it actually shows as a sell signal for tommorrow as long as the open is not less than 8611.

Since the fundamentals indicate a long, and the pattern is a short, I will stand aside. This is part of not fighting the trend, because it is still down. Aggressive traders could still short this based on this pattern, but this trend is a little long in the tooth so the odds of success are diminished.

I will stay on top of this one, and post any long side opportunities that develop in the bar pattern.

Friday, September 08, 2006

Trade Location

I had a few people recently ask about Silver and Gold. Here is a chart of Silver with two possible buy entries marked. As you can see the lower one was clearly the better entry than the higher one. In fact after the second one, the 5th bar after the breakout is actually a very good sell signal, trading back through the gap of the false breakout upwards.

How can we ever know this in advance? The answer is that you cannot. A great trader and friend by the name of Kevin Haggerty once told me that you should always buy at the lowest common denominator, translated, the lowest price setup. He feels that minimizes your risk.

So many people have fallen in love with the concept of diversifying into precious metals, which I feel is due to the media coverage these areas have gotten. One of my replies to someone recently was that Gold is setup better fundamentally to rally, but Silver has a more bullish chart pattern. These are both still true, but there is not a solid entry setup on a short term basis for these markets. Neither one of these markets has a pattern that I would buy here, especially Gold, which has been hit very hard the last couple of days. Silver, short term traders should have been short yesterday about halfway through the day.

Trade Location is of the utmost importance in making profits. Great ideas and bad timing will equal losing money. Make sure and try and take your bigger picture fundamental views and tie them into short term patterns that have the same bias. There are never any guarantees, but this will enhance your odds of success. Just because you think metals prices are going up, do not just run in and buy the futures or stocks blindly. Beware of "Location."

Thursday, September 07, 2006

BONDS

For those who subscribe to my service you are already aware of the selling opportunity I pointed out for BONDS. In this chart you can see that right on cue this market has started to head down. Before patting myself on the back too much I have to admit that I also had mentioned this sell setup the month before. I was early on that call, but timely in this one.

The Trendline drawn in red served as an ideal entry point into this market. I do not believe in drawing a bunch of lines on charts and then claiming that "see I was right it stopped right on this line......etc." However, if there is a clear trend line that can be drawn between two points like this one, it has to be taken into consideration for larger picture views on things.

Also notice down below that the commercials went heavily to the short side recently right as we were kissing this trend line. Our service did get a short trade marked on the chart that made 19 ticks profit. That is a short term trading method that does not ride larger moves. This setup has the potential for a larger move than that, so anyone short from above should just have trailing stops to try and ride this for a bit.

Normally taking half of your position off at an equal point to the intial risk, and then trailing the balance at a break even from your entry price, is a good way of both catching large moves and minimizing risk.

Tuesday, September 05, 2006

Yen and ledge patterns

Currency markets are challenging markets to trade due to all of the gaps due to overnight action. One effective technique that can be used is defining these small ledges drawn in on the left and taking breakouts from them.

What we are looking for is matching highs or within a tick or two, and also matching lows within a tick or two. Each of these must be separated by itleast one bar or more. Once the ledge is defined just trades the breakouts. In this market I would suggest not taking the breakouts with big gaps up like today's. Also, trading them in the direction of the trend is preferred.

Some of these work, but the risk increases quite a bit. Also, today's gap is not from a ledge, I just showed it to have a real life look at a large gap as it occurred. This market is poised for a rally so this gap could hold, but a better entry is likely. Ledges work in all markets, but like any technique cannot just be traded blindly.

Lewis, here is a current chart of crude in response to our exchange on this market. We are in a downtrend in price and the commercials who had gotten heavily short as marked by the downtrending red line, have moved back to neutral ground.

Open interest is not declining which is what we would want to consider long positions. That is somewhat simplistic and has exceptions, but is the general rule.

So we have a downtrend in price, and really nothing fundamental telling us to buy it, so short the pullbacks until this changes. If you go back to the post from mid August on this market, you can see how we have fallen further from the spot where I pointed out that the commercials were short.

Things do not always follow the script this perfectly, but it is suprising how often they do when you are keyed in on the right fundamentals.

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My wife and I have been dog lovers for many years constantly moving up in the food chain. When we first met she had a Cairn terrier I named Louie after Louis Winthorp in the movie Trading Places. Since that time we have moved up into the world of Saint Bernards and we have found our calling in life. We live on a ranch with a large crew of Saint Bernards mostly from rescues with a few exceptions.

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